Income Protection Vs Critical Illness: 10 key issues

In the UK Critical Illness Cover outsells Income Protection by around 5 to 1.

To put that into numbers, on an individual basis around half a million people each year buy critical illness cover, compared to about 100,000 purchasing IP.

The main reasons for this gap are fairly well known: most people prefer a lump-sum benefit to an income, CI is perceived to be an ‘easier’ sale, IP is too difficult to underwrite, CI is sold as an add-on to life cover, IP suffers from comparisons with PPI and so on.

In an ideal world the benefits complement each other as they represent different risks. CI typically provides a lump sum in the event of a potentially life threatening illness while IP pays income if you cannot work until you either can work or retire. One pays off the debts while the other pays the ongoing bills, if you like.

But for many people affording both is a luxury. Indeed, some advisers are pro-CI while others are pro-IP, occasionally to the extent of only recommending one type of benefit even for those who could potentially afford both.

So let’s take a look at the key issues.

1. Design and history

CI was designed as a major medical expenses plan back in the 1980s. It was developed in South Africa to allow people to pay for life saving operations and treatment, which many could otherwise not have afforded.

In the UK, however, with the National Health Service in place, the product found success being sold alongside life insurance primarily as mortgage protection cover (‘suffer a heart attack and pay off your mortgage’).

While this is exactly how many policies have been sold, some advisers see this as a bit of a round peg in a square hole and instead argue that IP provides more comprehensive cover, even for mortgages.

Income Protection, formerly known as permanent health insurance, is a long-term insurance policy that pays out if an individual is unable to work due to injury or illness, and is described by Which? as the one protection policy every working adult in the UK should consider and the very one most of us don’t have.

There are around 3-4m IP policies in force across both the group and individual markets. Whether or not this represents a successful market is open to debate.

2. Cost

Is it possible to compare the two products on price alone? Some advisers argue that IP is less expensive than CI and that the latter is therefore inefficient for those on a budget, even for mortgage protection.

To an extent, whether or not IP is cheaper depends on the individual circumstances and how the two are compared, but if we look at a quote for a 35-year old covering £250,000 over 30 years CI would cost in the region of £90 per month, while a IP policy could potentially pay over £300,000 as an income if they could never return to work would for around £30 per month.